It gets worse: Hedge fund star predicts bigger crisis than '08

Stan Druckenmiller, one of the best-performing hedge fund managers of the past three decades, has a warning for the youth of America: Don't let your grandparents steal your money. Druckenmiller, 59, said the mushrooming costs of Social Security, Medicare and Medicaid, with unfunded liabilities as high as $211 trillion, will bankrupt the nation's youth and pose a much greater danger than the country's $16 trillion of debt currently being debated in Congress. “While everybody is focusing on the here and now, there's a much, much bigger storm that's about to hit,” Druckenmiller said in an hour-long interview with Stephanie Ruhle on Bloomberg Television's Market Makers. “I am not against seniors. What I am against is current seniors stealing from future seniors.” Druckenmiller said unsustainable spending will eventually result in a crisis worse than the financial meltdown of 2008, when $29 trillion was erased from global equity markets. What's particularly troubling, he said, is that government expenditures related to programs for the elderly rocketed in the past two decades, even before the first baby boomers, those born in 1946, started turning 65. Druckenmiller stopped managing money for outside clients in 2010 after three decades in the business, including more than a decade as chief strategist for billionaire George Soros. From 1986 through 2010 he produced average annual returns of 30 percent, one of the best long-term track records in the industry. Spending Cuts President Barack Obama and Congressional leaders are locked in a disagreement over the U.S. budget deficit. If no agreement is reached today, federal spending will be reduced by $85 billion in the final seven months of this fiscal year and by $1.2 trillion over the next nine years. Half of the cuts would come from defense and half from domestic spending. The reductions were designed to be so unpalatable that lawmakers would come up with a way to replace them. Americans want Congress to delay the spending cuts to give the economic recovery more time to take hold, according to a Bloomberg News poll conducted Feb. 15-18. When Washington does confront the deficit issue, Americans back a compromise that includes more tax revenue and fundamental changes to Social Security and Medicare. Fifty-one percent of respondents said overhauling Social Security is necessary to substantially reduce the deficit, and 58 percent said the same of Medicare. Seniors' Lobby In 2011, Social Security, Medicaid and Medicare accounted for 44 percent of the government's $3.7 trillion in expenditures, up from 34 percent in 1990, according to statistics compiled by the government's Bureau of Economic Analysis. “The seniors have a very, very powerful lobby,” Druckenmiller said. “They keep getting more and more transfer payments” from younger generations through what's essentially a pay-as-you-go system, he said. There were 40 million people in the U.S. 65 and over, according to the 2010 U.S. Census, the year before the first baby boomers hit retirement age. By 2020, that number is expected to grow to 55 million, according to the U.S. Department of Health and Human Services. Speaking Out As the elderly population rises, the number of workers who pay into Social Security is dropping. By 2030, there will be about two workers per retiree, down from 3.4 workers in 2000, according to the 2004 book “The Coming Generational Storm” by Laurence Kotlikoff and Scott Burns. If a three-year-old today is taxed at the same rate as today's working population, he will get less than half of the benefits that our current seniors are getting, Druckenmiller said. Usually press shy, Druckenmiller said he chose to speak out on the issue now, because he felt he hadn't done enough before the financial crisis. As early as 2005, he forecast the impending real estate crisis and its effects on banks “backing all those silly instruments,” he said. He met with a couple of policy makers and a representative of the U.S. Congress at the time. He also spoke at the Ira W. Sohn Investment Research Conference in New York. “I had my 30 charts with colors and pictures and laid out for them why I thought it was going to be a huge, huge problem for the U.S. economy and the U.S. financial system,” he said in the interview. No 1982 Today he sees an even bigger reason for concern because of the government's massive unfunded liabilities. He also sees trouble with what he calls its trickle-down monetary policy. The Federal Reserve's decision to hold interest rates near zero and buy $85 billion of assets a month is pumping up the stock market, all with the hope that rich people will spend those gains, and that money will trickle down to the rest of the country. While stocks may continue to rise for a while because companies are buying back shares and retail investors are coming back to the market in search of returns, the gains probably won't last, Druckenmiller said. “The chances of this being a new bull market like 1982 aren't high because we're not attacking the crux of the problem, which is too much leverage and too much debt,” he said. “I don't know the timing of when the markets will respond to this, but it will happen.” Druckenmiller said his next step is to talk to young people directly, including at his alma mater, Bowdoin College in Brunswick, Maine. “Look at our young people who are obsessed with the environment,” said Druckenmiller, who sits on the board of the Environmental Defense Fund. “They are looking at the consequences of our actions 50 to 60 years from today.” His goal is to get them to have the same far-sighted reaction to their economic future. “With the proper education and with proper voices out there, we could have 40 million kids marching down to Washington.”